I don’t have to tell you all that these are crazy times in the financial sector. On Monday the stock market witnessed the single biggest decline since the September 11th, 2001 attacks, with the Dow Jones industrial average plunging 504.48 points, or 4.4 percent on a record 8 billion-plus trades. Luckily things recovered a bit after a tumultuous ride on Tuesday, but the world is still reeling from the events of this past weekend.
The double-whammy news on Sunday that
Lehman Brothers was facing bankruptcy and
Bank of America was buying
Merrill Lynch shook the American economy to the core.
I was watching the news Sunday afternoon when the news of Merrill’s takeover hit. I mused that I might have to go back in and edit my resume as the company I worked for ten years was no longer Merrill Lynch but Bank of America. I joke, but it’s crazy to see a company you worked for get gobbled up by another institution.
A few hours later the TV flashed with images of Lehman employees throughout the country packing up their personal belongings. I was, as I’m sure you were, shocked to see the 158-year old financial icon being washed away, filing the largest bankruptcy in American history. Watching all this all I could think was “What’s next?” Enter AIG…
On Monday and Tuesday, the news was that AIG would face bankruptcy if it could not secure additional financing. I wondered if we could afford to not support AIG. The entire financial systems both in the US and the world could be adversely affected even more if the Fed failed to take action on AIG. If they refused to step in, other financial institutions may be affected and begin to collapse as well. I wondered if it isn’t time for the Fed to shore up the dam and say enough is enough.
As these thoughts raced through my head Tuesday, I read the Fed agreed to provide $88 Billion bridge loan to AIG in exchange for an 80% stake in the company. The shareholders would be severely diluted, but AIG would be allowed to continue to operate and its customers and trading partners would be protected. I’m guessing here, but their CEO will likely face the same fate as the FNM and FRE CEOs.
What do you think? Has the Fed struck the right balance by ensuring the shareholders and executives pay, while keeping the financial system intact? Or have they gone too far and taken on too much debt saving a company that should have “paid” for their mistakes… even if paying may meant a spreading crisis?
Either way, all this news is sure to worry even the most stalwart investor. But I believe before we all go running for the hills, it’s time to take a step back, take a deep breath and begin to strategize. Whenever I get rocked, the words of star investor Peter Lynch come to mind, “The key to making money in stocks is not to get scared out of them.” Yes, that’s hard to do when you see your hard-earned money slipping away. But if you think long term, as Lynch does, it’s easier to keep your head about things. “When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.”
I’d like to hear from you all in the Zecco community. Have recent events spooked you? Or are you confident that things will turn around and are willing to ride it out? Do you “Buy on Greed and Sell on Fear”? Do you have the discipline to stay on your investing plan even when the market falls? Please share your thoughts with other ZeccoShare members. One way or another, we’ll get through this together!